Successfully maximizing refunds while ensuring compliance is quite the challenge when you consider the complexities of severance tax—and we’ve seen firsthand that it’s rare for companies to actually take advantage of all the refunds available to them. If you’re unsure of whether or not you’re taking advantage of all the severance tax refunds available when it comes to tax refunds, we suggest revisiting your severance tax strategy—and testing out some of these surefire tactics for extracting the most from your return.
Don’t fall into the trap of oversimplifying severance tax
We find that companies frequently consider the concept of “severance tax” to be one single requirement, when in reality, the amount of reviews that fall under the umbrella of severance tax is quite significant compared to other indirect taxes. There’s a lot that severance tax encompasses, and companies need to have a rock-solid understanding of how everything works to properly file and receive the different incentives.
Additionally, from a checks and balances perspective, companies may overlook how one filing impacts another. Completing a monthly severance tax return involves considering production reported, state and federal royalty deductions and payments, etc. Quarterly, the state submits data to ensure accurate claims by all entities. Errors at any stage can result in refunds or liabilities.
In conclusion, a thorough grasp of the various refund or return options is crucial, as it directly influences the amount you receive back. Additionally, staying informed about state laws, recent legislation, and relevant stakeholders is equally vital.
Getting a full refund for marketing costs and severance tax requires a multi-pronged approach
Maximizing your severance tax refund and reclaiming marketing costs demands a multifaceted strategy. Start by ensuring eligibility for reduced tax rates for applicable wells. Many companies overlook potential reductions, so thorough exploration of available incentives is essential to minimize your tax burden.
Legislative incentives like marketing costs can decrease your overall tax liability, lowering overall payments. While many companies include third-party costs on their severance tax returns, few include all allowable expenses, resulting in higher taxes. Due to the complexity involved, most operators enlist outside consulting firms to capture these expenses accurately. Reach out to Revenew to explore strategies for managing these costs effectively, enabling monthly real-time severance tax savings.
It pays to be on the lookout for changes to severance tax
Realize also that your approach to severance taxes shouldn’t be set in stone. There are many variables that can change and affect the amount that you owe—or more importantly, the amount that you can get back—including:
- Changes to legislation: Because severance tax is handled on a state-by-state basis, it’s possible that new legislation can be proposed or passed in your areas of operation, which could have sweeping repercussions for your severance tax burden. For instance, when the state of Texas approved reduced tax rates for high-cost gas, it initially didn’t seem like it would present a major disruption for severance taxes. However, it quickly turned into the biggest money-maker that severance taxes have ever seen, thanks to details that allowed for reclassifying oil wells to gas wells and then applying for reduced tax rate incentives. With this change, for one operator in the Permian, we successfully negotiated a $20 million refund purely by reclassifying wells.
- Variance by state: Aside from legislation differences between states, there are also operating differences between state departments and state comptrollers. In particular, we often see different degrees of expertise and set processes for oil and gas taxes across states, an issue becoming more prominent as operators widen their search for resources into areas that have historically not had such a large oil and gas presence. In West Virginia, we worked with one auditor who had never worked in oil and gas—only coal. This had left our client in a difficult position, where they had needed to step in and provide more of the severance tax knowledge than they felt comfortable with, until we joined the project.
- Evolving needs after a merger or acquisition: Finally, there are numerous reasons why an acquisition may require you to revisit your severance tax strategy. Expanding into a new state or resource type are two common ones, but another important one is the need to verify the approach the acquired company had taken with severance tax. Let’s say Company A acquires Company B, which was much smaller and operated in a different state. After the acquisition, Company A needs to make sure there’s no liability, existing risk, or errors that they can recoup on immediately.
Stay proactive to optimize severance tax refund potential
Navigating the complexities of severance tax and maximizing refund opportunities requires companies to stay on their toes, keeping up-to-date on legislative incentives, conducting thorough analyses of comparative performance, and identifying any and all opportunities for tax incentives. Companies that remained, informed, proactive, and diligent ensures no profit-maximizing opportunity is missed.